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The pressure switch has an adjustment for the low pressure cut in and the high pressure cut out. If the pressure range is set too close the cycles will be short. You need to work out which setting is wrong by looking at the pressure guage when it is cycling and adjust the pressure switch accordingly.

If you do mostly heavy work with hard materials, then you're probably better off with the more powerful cut out tool. However, if you do small jobs or crafts, the more versatile basic rotary tool would probably be your first choice.

You need a # 402 bit. This comes with a screw on top that detaches and goes through the hole in the cutting wheel (very small hole). Then just re-attach it to the bit and you're in business. Depending on the particular cut-off wheel you're using, the wheel can be extremely fragile. Even though it will cut steel, it is brittle. ALWAYS wear safety glasses when using a cut-off wheel particularly, they will inevitably shatter and go flying!
Probably best to go to a local hobby store, buy a few bits for $10, and pick the owners brain about the tool.